Europe Disappoints; Euro Resilient, Yen Weak

European officials disappointed investors by not reaching an agreement on Greek funding.  The euro quickly dropped about three quarters of a cent to just below $1.2740 in the Asia session.  Perhaps European dealers, more accustomed to such disappointment, or instead focused on the resumption of the discussion on Monday, helped bid the euro back to $1.28. 

There are many moving parts, between a moratorium on interest payments for several years, lower interest rates, bond buy back, but one thing that does not appear to be on the table is an official sector haircut that the IMF has advocated (but refuses to participate in), and that Bundesbank President Weidmann acknowledges is necessary.  

The Athens Stock Exchange index is off about 0.5% near in early afternoon turnover, led by a 3.25% drop in financials.  However, there is a sense that a deal will be forthcoming and Greek 10-year bond yields are off 35 bp and at 16.59%, the lowest in a month.  The issue is how to keep the official creditors whole without removing points of leverage to ensure Greece enacts structural reforms. 

Part of the euro's resiliency may have to do with the new weakness of the yen and the cross rate demand.  After initially hold below JPY82 initially, but after it broke through in late Asian turnover, it has not looked backed and managed to push to JPY82.30 in the European morning.  The euro also went bid against the yen.  The euro is trading above JPY105 for the first time since early May..   Recall that last Wednesday, the euro was trading below JPY101. 

The main driver of the yen's weakness continues to be expectations that next month's election will see a coalition led by the Liberal Democrats that will be much more aggressive on combating yen strength through open-ending quantitative easing, which may include the purchase of foreign bonds.  

Separately, Japan  reported a JPY549 bln trade deficit in October, its fourth consecutive monthly shortfall.  Exports were off for the fifth consecutive month.  Exports to Asia, which accounts for over half of Japan's exports was off almost 5% from a year ago, led by a 11.5% decline in exports to China, its largest trading partner.  Exports to Europe are off 20%, while the 3.1% increase in exports to the US--Japan's second largest trading partner--was hardly a sufficient offset. 

Lastly, we note local press reports that show large Japanese banks were net sellers of government bonds in October.  The JPY2.34 trillion of net sales was the largest in six months.  While this raised some eyebrows, note that regional banks and insurance companies stepped up their purchases and combined (~JPY2..47 trillion) more than offset the sales by the largest banks. 

The minutes from the BOE's meeting earlier this month showed an 8-1 vote not to extend the gilt purchases.  Miles, whose dovish comments earlier this week, hinted that he favored more purchases, failed to convince any one else on the MPC.

A rate cut was discussed, but it was not seen as particularly helpful and some thought it could do harm.  Sterling itself remains largely sidelined and has trading within the narrow range set on Monday-Tuesday (~$1.5880-$1.5935),  The euro's sell-off saw it approach the GBP0.8000 area, recording a six-day low, but it recovered back to almost GBP0.8050. 

With the US on holiday tomorrow and the hourly momentum studies stretched after the foreign currency recovery, follow through gains may be difficult to sustain.  There will be some passing interest in the weekly jobless claims figures that are likely to be distorted still by the east coast storm.  The Markit PMI reading may attract some interest, but the the times series is too new to have many followers.  University of Michigan consumer confidence will also be reported today.  Note that while business confidence seems weighed down by the fiscal cliff uncertainty, consumer confidence is at multi-year highs.